Investing: 3-Steps To Winning The Loser’s Game

I don’t mean to say that those who play tennis are losers. What I mean to say is that the way you win at tennis is different than other games. In order to win a winner’s game, like Football, a person (team) must make winning moves, they must execute the right plays. In a game like tennis, one can still win without necessarily making winning moves. So long as you keep the ball in play, sooner or later your opponent will make a mistake, and you’ll get the point. A loser’s game is one in which a player can win by making the fewest mistakes.

Investing is a loser’s game.

Investment pro Charles Ellis popularized this idea back in 1975 with an article he penned for the Financial Analysts Journal, which he ended up turning into a book in the 1990’s. He posits that if you try to turn investing into a winner’s game, where your success is determined by whether or not you make the right moves, you’ll most likely lose. Instead of trying to win, the way to actually win in investing is by playing it like a loser’s game – by avoiding mistakes.

Below are three rules you can follow to help avoid common investor mistakes, and increase your chances of winning the loser’s game.

1) Diversify

Investing in stocks can be extremely risky. One simple way of lowering the level of risk in your portfolio is by spreading the risk around – by diversifying.

Think of all those poor souls who lost everything with the collapse of Enron. Well, if they did lose everything, it’s because they weren’t diversified. Luckily for us, diversifying is incredibly easy. You can do so by purchasing a mutual fund or an index fund. For example Vanguard has an index fund called Vanguard Total Stock Market ETF (VTI). Purchasing just one share of this ETF gives you exposure to the entire US stock market. There are bond funds too, like Fidelity Total Bond (FTBFX), which offers exposure to Treasury bonds, corporate bonds, MBSs, and more. If you don’t know what any of those are, don’t fret. I simply mean to say that its a diversified investment.

Not being diversified is considered a mistake. Avoid it! Lest you too lose it all when your favorite company goes bankrupt.

2) Don’t touch it

There’s a saying out there, which I love:

“Don’t just do something, stand there!

It captures the perfect solution to many a market quandary. As long as you don’t own large amounts of triple levered ETFs, usually the right choice during market downturns is to continue with your existing strategy. In times of trouble or stress, do like the British do – Keep Calm And Carry On.

The biggest mistake investors make is selling securities at the wrong time. When I say, “at the wrong time,” I really mean to say, “at the bottom of the market.”

Investors have a terrible knack for selling their investments when prices are down simply because they are afraid that they are going to decline further. It’s as if they have forgotten that markets go through cycles; there are ups and there are downs. Ups are usually followed by downs. Downs are usually followed by ups. This leads us to rule number 3.

3) Be patient

The most successful investors take the long view. How long? Well, Warren Buffett has said that his favorite holding period is forever.

I recently looked at a stock portfolio worth $1.7 million. It only had 7 stocks in it (she broke rule #1, but this woman took the long view). Of this $1.7 million portfolio, $1.4 million was unrealized capital gains. This is financial speak for, “her portfolio earned $1.4 million!” She held the same seven stocks since the mid 1995. That’s a 22-year holding period, and counting!

She went through the dot com crash and the most catastrophic economic crisis since the great depression. She weathered the market cycles and refused to sell her securities. And over 22 years, she managed to earn more than 8% per year!

Look, amateurs get caught up in the day-to-day CNBC reality TV show. Amateurs worry about the current level of the Dow Jones Index. Amateurs are constantly looking for a “hot buy” that’s going to pop in price within the next week.

Oh, I didn’t mention, amateurs also tend to lose a ton of money in the stock market.

Want to win a loser’s game? Take the long view.

A Final Thought –

Many investors equate action with progress. “If I buy/sell now, then i’ll improve the chances of success in my portfolio,” goes the line of thought. But this line of thinking equates investing with a winner’s game. Stay diversified, fight the urge to make unnecessary changes to your portfolio, and let the magic of time work in your favor.

Remember, investing is a loser’s game. Stop making mistakes, and you’re well on your way to winning.

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Disclaimer: None of the securities mentioned above are meant to serve as investment recommendations. I simply bring them up as examples of diversified single-position investments.